The Greenspan Gospel

Alan Greenspan considers himself to be the luckiest economist in the world. "I was very fortunate," Greenspan told NEWSWEEK of his lengthy and eventful tenure as chairman of the Federal Reserve, which lasted from August 1987 to January 2006. "I emerged on the scene at the beginning of this extraordinary half-generation."

The end of the cold war, globalization, the rise of China and the rampant spread of information technology set the stage for a long spell of economic growth, high productivity, low inflation and booming markets. Having served four presidents, and having overseen two decades of nearly uninterrupted growth—the U.S. economy suffered just two brief recessions under his watch—Greenspan has arguably been the most successful American public official of the past three decades. "In terms of supporting economic growth and preventing inflation, Greenspan is the best, bar none," says Mark Zandi, chief economist at Moody's Economy.com. He was, in Bob Woodward's assessment, The Maestro, conducting an international symphony of investors, markets and politicians. Greenspan spoke in a dense, endlessly parsed lingo of "Fedspeak," and his words defined whole eras. (No recollection of the 1990s tech bubble is complete without an allusion to the Greenspan phrase "irrational exuberance.")

It has been a long and unlikely ride for the skinny kid from Manhattan's Washington Heights who played jazz saxophone professionally before turning to economics. The former Ayn Rand acolyte eagerly joined the system—establishing his own economic-consulting firm, and becoming the go-to economist for Republicans.

He received a rude introduction as Fed chief in 1987; just two months after he was confirmed by the Senate, the stock market crashed. He managed through the recession of the early 1990s, earning the enmity of the elder President Bush for not cutting rates faster. "I reappointed him," George H.W. Bush said. "And he disappointed me."

Greenspan's reputation for always seeking to improve his knowledge of the markets rose along with the Dow in the 1990s. But theoretical economics was never far from his mind. In his new memoir, "The Age of Turbulence," which NEWSWEEK excerpts this week, the 81-year-old recalls going to Venice with his wife, NBC News correspondent Andrea Mitchell. Gazing at the lovingly preserved palazzos, he wondered what economic goods Venice produces these days: "What's the value-added here?"

This single-mindedness led to one of Greenspan's signature breakthroughs. The prevailing view held that an unemployment rate's falling below 6 percent would cause inflation. Greenspan believed that the New Economy rendered that assumption moot. In 1995 and 1996 he persuaded his colleagues on the Federal Open Market Committee to leave rates low despite falling unemployment. "I didn't find the arguments he was making that convincing at the time," says Alan Blinder, a former vice chairman of the Fed. "But his hunches were often right when statistical models were wrong." The unemployment rate fell below 4 percent in the 1990s without triggering inflation.